F/X Weekly Comment

Ah good, all is well with the world again, and normal service has been renewed. My forecast last week has proved to be just about as accurate as George Osborne's growth predictions. I think I can leave the headers in place from last week, but I'll have another go at the content:


Greek Debt (again)

The pound lurched lower against the Euro this week as the Greek austerity vote passed predictably through parliament. In the short term, at least, a Greece default is unlikely, and this is deemed to be positive for the Euro. Within a couple of weeks a second bailout package will be agreed, so there is scope for a further boost to the single currency. The plain fact is though that the Eurozone debt problems have in no way been resolved, only deferred, but any loss in Euro sentiment is being countered by the abject surrender of sterling and the bleak outlook of the U.K economy.

Pathetic Sterling

Harsh? Definitely not. Friday's PMI data showing that expansion in the UK’s manufacturing sector dropped to its lowest rate in 21 months in June brought the pound under further selling pressure on the day. Even the saving grace that Asian and Eurozone data releases were equally weak didn't manage to get sterling up above 1.1100. The pound has fallen 9.1 percent in the past 12 months, making it the second-worst performer among 10 developed-market currencies after the dollar. Worsening economic growth has prompted traders to reduce bets on higher rates, and investors are betting that 3M (Merv and his Merry Men) will start to raise borrowing costs next May. As recently as February, data was pointing to a rate increase in May of this year.

Where now?

I think for all our sakes that I need to drastically reduce any sense of optimism for sterling at present. We tested the 1.10 level this week, and unless something spectacular happens, we could see the pound break down through that level next week.

A bientot, Rob